The Federal Treasury's new Green Paper "Financial Services and Credit Reform: Improving, Simplifying and Standardising Financial Services and Credit Regulation" sets out some reform options for the financial services sector and the Commonwealth takeover of some aspects of regulation.
It's important to understand that although the Green Paper sets out options, there is still some uncertainty about what those options entail as the detail has not been fleshed out and nothing has been set in stone yet. The financial services sector thus has a good opportunity to offer its views now and help shape future Government action in this important area.
Consumer credit: Mortgages and other credit products
Currently the States and Territories regulate consumer credit products and lending (through the Uniform Consumer Credit Code (UCCC)) and, in some jurisdictions, consumer credit providers through different licensing regimes. Changes to the UCCC require approval by a Ministerial Council of the States and Territories and is slow and difficult to achieve. Only some States and Territories regulate mortgage brokers and they do this differently. Commonwealth regulation of financial services providers under the Corporations Act largely excludes credit facilities but the ASIC Act provides general consumer protection rules which cover credit.
Industry and consumer complaints about these unsatisfactory arrangements led the Productivity Commission in its Report on a Consumer Policy Framework to recommend transferring responsibility for regulating all consumer credit to the Commonwealth Government, to be regulated by ASIC. That Report recommended that the new regime should:
- cover all credit products and intermediary services (including broking services and the provision of advice)
- include a national licensing system for finance brokers and a licensing or registration system for credit providers, both requiring the availability of an approved alternative dispute resolution scheme, and
- re-enact the UCCC as Commonwealth law, to operate independently within the broader financial services regulatory regime.
At the March 2008 meeting of the Council of Australian Governments (COAG), the governments agreed in principle to the Federal Government's being the sole regulator of mortgage credit and advice, including persons and corporations engaged in mortgage broking activities.
Now the Federal Treasury has put out its proposals as to how this will be achieved in the Green Paper.
Three options are set out:
- maintain the status quo (which in the face of the COAG agreement and the problems identified is unlikely);
- the Federal Government to regulate all credit - this would achieve uniformity and a single regulator but, says the Paper, there would be significant transitional and ongoing costs for both the Government and businesses; or
- the Federal Government to regulate all aspects of mortgage credit (mortgage lenders and brokers and mortgage advice) but not bank fees or charges, leaving the States and Territories with responsibility for all other consumer credit except margin loans (see below).
It appears that Treasury intends that Option Three (and presumably also Option 2) would roll mortgage credit regulation into the FSR regime in Chapter 7 of the Corporations Act, meaning that credit providers (ADIs and non-ADIs) and mortgage brokers would be subject to the AFSL licensing regime and the product disclosure and financial advice disclosure requirements.
It is noteworthy that the Treasury does not discuss whether the other substantive regulation of credit in the UCCC (eg. advertising restrictions, enforcement, comparison rates, re-opening of contracts) would carry across into federal law as the Productivity Commission recommended (either for all consumer credit under Option 2 or for mortgage credit under Option 3). This is a key point which submissions could address - should federal regulation of credit to be based purely on a Corporations Act Chapter 7 model of licensing, disclosure and some market conduct regulation, or should it continue with the detailed rules developed over many years in the UCCC?
Some industry leaders have criticised Option 3 (Federal Government to take over only mortgage credit) because it would result in the many lenders who provide mortgage and non-mortgage credit answering to nine regulators instead of the current eight, and it would do nothing to fi x the current problems with the UCCC for all other credit: eight jurisdictions need to agree to and implement any changes to the UCCC, making it very hard to change and hence unresponsive to market developments, and national credit providers need to deal with eight different enforcement agencies.
Consumers use margin loans to buy financial products (such as listed shares, fixed interest securities and units in managed funds) which act as the security for the loan. While the underlying financial product is already regulated, the margin loan to buy them mostly is not.
The Green Paper sets out three possible options:
- maintain status quo (so that margin lending would continue to be largely unregulated);
- include margin loans as a financial product under the Corporations Act and apply the Chapter 7 regime;
- develop a separate Commonwealth regulatory regime for margin loans (although this would largely mirror the Corporations Act and create regulatory overlap for businesses offering margin loans and other financial products).
Option Two therefore is similar to the options for mortgages – it would make margin loans a financial product regulated by the FSR regime, with the resultant need for licensing, and disclosure and financial advice requirements.
The Council of Australian Governments has already agreed in principle to the Commonwealth as regulator for trustee companies. This could be done, suggests the Green Paper, either by regulation based on consumer protection and overseen by ASIC, or a regime based on prudential supervision by APRA.
The Green Paper suggests the regulation of promissory notes should be harmonised, so that all promissory notes issued to retail investors will be treated as debentures.
So when are submissions due?
There is only a short window of one month to comment - all submissions must be in by 1 July 2008. Stakeholders are invited to comment on the options presented in the Paper, or to submit their own proposals; those comments will then go back to the Council of Australian Governments for consideration. you'd like help in drafting a submission, please contact your nearest Clayton Utz partner.
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